EMBA – June 2016

ON CHINA

- Introduction- History- Economic challenges- Political challenges- The good news for China- The need for a new economic model

arne jon isachsen

1

INTRODUCTION

Gideon Rachman in Financial Times, 28 December 2015: Not one global power is optimistic and even in America, which should be cheering, the mood is sour.

And the Chinese, on their hand, have a political anxiety rooted in president Xi Jinpings dynamic, but unpredictable, leadership.

arne jon isachsen

2

The biggest common factor, Rachman says

”… a bubbling anti-elite sentiment, combining anxiety about inequality and rage about corruption that is visible in countries as different as France, Brazil, China and the US.”

arne jon isachsen

3

HISTORY

1978: Deng Xiaoping takes over. “Reform and opening up”1989: Deng – and Tianamen Square incident 1999-2001: Zhu Rongji deals with the State Owned Enterprises (SOEs)

30 mill lost jobsWTO member in December 2001, along with new market opportunities

arne jon isachsen

4

2008-2009: Seeds of today’s problems planted. The financial crisis is met the old fashioned way: Debt-financed real investments

2012-2013: Xi Jinping shows charismatic, fearless and vigorous leadershipBut words are not followed up by deeds

2015: Annus Horribilis of Economic Reform (Barry Naughton)

arne jon isachsen

5

Less growth

arne jon isachsen

6

Unstable markets

arne jon isachsen

7

Stock market like a yo-yo

The «China Dream» abruptly ended.

Government funds purchasedremarkable amounts of shares.No more short selling.

arne jon isachsen

8

SHANGHAI SE COMPOSITE - PRICE INDEXFROM 4/3/11 TO 4/3/16 WEEKLY

2011 2012 2013 2014 2015 2016

1500

2000

2500

3000

3500

4000

4500

5000

5500

HIGH 5166.348 12/ 6/15 LOW 1979.206 28/ 6/13 LAST 2874.147 Source: Thomson Reuters Datastream

Paul Krugman: “… no clue what they are doing”What happened and why?

arne jon isachsen

9

Some examples:

COSCO – with debt/equity ratio of over 200 percent.Orders 11 new containerships – highly subsidized – deliverable in 2018Loses 580 million dollar January-September 2015.

arne jon isachsen

10

Overcapacity in shipbuilding. Overcapacity in the fleet.Merge with China Shipping Group - the world's largest container line.Increasing market share. But what about the debt? And the efficiency?Hardly the solution to structural problems.

State-owned enterprises. Over 40 percent of those in deficit (2013).

arne jon isachsen

11

ECONOMIC CHALLENGES

Inconsistent and unsuccessful economic policy over the past six to eight years.Some of today’s economic challenges

1. Short-term stimulus to keep growth from declining too much2. Reform of SOEs to achieve long-term growth3. Better functioning capital markets4. Stop capital outflow

arne jon isachsen

12

Ad 2) Reform of SOEs is imperative.

Reduce surplus capacity. China's surplus capacity in steel corresponds to full capacity in the United States, Japan and Germany combined. CCP runs SOEs to too great an extent. Good for the nomenclature.

Not for the economy. 2013 – good plans drawn up. But not put into effect.

arne jon isachsen

13

Zhu Rongji was a man of action. Prime minister, responsible for reform of SOEs, 1999-2002. 30 million jobs disappeared.

BUT: Entered WTO December 2001 – opened up new markets.

This time – new jobs in the service industry. Up to 6 million jobs could disappear.Concerned about mass riots (cf. what happened last time)

arne jon isachsen

14

Ad 3) Has to use state finances to cover SOEs’ losses (as 15 years ago).

Better allocation of credit.

arne jon isachsen

15

Ad 4) Last year, central bank (PBOC) reserves fell by 500 billion dollar, January and February, 100 billion more each month. Now, reserves are about 3,200 billion dollar.(Norwegian Pension Fund about 700 billion dollar)

Something has to give.Either reintroduce capital flow control.Or allow for a serious depreciation of the yuan.

arne jon isachsen

16

Why so much capital outflow (even with current account surplus):

Less return at home Diversification Depreciating yuan Anti-corruption campaign and people get anxious Anti-corruption campaign and people fear new regulations

arne jon isachsen

17

THE POLITICAL CHALLENGES

China – 33 provinces, 1.3 billion people.Contrasts to EU – 28 countries and “only” 500 billion people.

Beijing and Brussels share many of the same challenges“Tian gao, Huangdi yuan” – “Heaven is high, and the emperor is far away”

November 2013, new economic reformsBUT: Lacks a ”coherent framework for implementation”

arne jon isachsen

18

State Council by Premier Li Keqiang, less power.

Two committees under Xi Jinping’s leadership:Finance and EconomicsDeepening Reform

This gave CCP more influence than reform-keen bureaucrats.

arne jon isachsen

19

THE GOOD NEWS FOR CHINA

More than 35 years with amazing growth.Time for a brake?

Less favorable starting point these days in three areas Demographics Technological catch-up Export markets

arne jon isachsen

20

FDIs go both ways.

New capacity in SOEs and steel, ”cutting edge green technology”.

arne jon isachsen

21

Innovative and dynamic private enterprises within biotechnology, renewable energy and IT (Alibaba, Baidu, Huwai)

China established Asian Infrastructure Investment Bank (AIIB), where Norway also participates, to invest in infrastructure; roads, ports, airports, railway, cf. The new Silk Road.

Linking neighboring countries closer. Comparable to the Marshall Plan 1948-1952.

arne jon isachsen

22

THE NEED FOR A NEW ECONOMIC MODEL

From real investment- to consumption-driven growth

More even income distribution Social safety net SOEs pay dividends to the state

Does that necessitate democracy in some shape or form?

arne jon isachsen

23

In November 2013 – Third Plenum – Xi Jinping said

“… market forces would play a “decisive” role in the economy, but also said the Communist Party's hand needs to stay strong, contradictions that instead of giving a clear direction signaled a difficult road ahead for economic reforms.”

http://www.wsj.com/articles/SB10001424052702304644104579193202337104802

arne jon isachsen

24

arne jon isachsen

25